As the U.S. housing stock ages over time, real estate investors will increasingly confront unique challenges when they find houses to flip in Home Owners Association (HOA) communities.
Since 1960, HOAs have become a staple of the U.S. housing market. According to a 2019 housing data analysis, opens in a new windowThe Rise and Effects of Homeowners Associations, HOAs govern 80% of houses built in new subdivisions in the U.S. today. Currently, more than 20% of all existing single-family homes in the nation are in an HOA community.
Find Houses to Flip in HOA Communities | The Good the Bad and the "Uh-Oh"
When you find houses to flip in an HOA community, you may also find that the properties come with a lengthy list of binding Covenants Conditions and Restrictions (CC&Rs). CC&Rs describe the requirements and limitations on what you can and cannot do with or to your properties.
The goal of CC&Rs is to protect quality of life and preserve and enhance the community’s property values. However, as with any agreement entered into by multiple parties with competing needs, HOAs bring a variety of challenges and benefits that you should be aware of.
In the majority of HOA communities the CC&Rs make pretty good sense and are relatively easy to comply with. Few would argue that rules requiring lawn maintenance and trash removal are bad for the community. Generally speaking, home buyers agree to pay HOA fees and abide by CC&Rs for three reasons:
- The HOA provides services and amenities that improve quality of life in the community.
Amenities and services vary by location (and by the size of monthly HOA fees). HOA amenities can include access to a community clubhouse, pool, tennis and basketball courts, golf course, and more.
Homeowners in an HOA community may also share in the cost and benefits of valuable services. A security gates, security patrols, trash collection, landscaping and other HOA services add to the quality of life there.
- Annoying or offensive homeowner behaviors (not covered by local laws) can be prevented or mitigated by CC&R rules.
Threatening or criminal behavior remains under the jurisdiction of local law enforcement. However, in a situation where annoying or irresponsible property owners continue to breach CC&R rules, the HOA can levy hefty fines against the offenders. If necessary, the HOA can bring legal action on behalf of the community.
- HOA amenities and CC&R rules can help maintain or enhance property values.
Homes in HOA communities have market values averaging a minimum of 4% higher than comparable homes outside of HOAs. This translates to an average of $13,500 greater value.
For a fix-and-flip or rental property investor who has experienced the cost and inconvenience of construction site theft, purchasing a property in a community that is patrolled by security has obvious benefits. And, of course, it can be much easier to market a renovated home that comes with desirable amenities and services. If your property in an HOA community maintains or increases its value over time, that is a win-win.
HOA fees can be excessive and burdensome. A 2015 Trulia study found monthly HOA fees in the U.S. averaged $331—with fees in some HOA communities approaching $600 per month. In addition to these monthly association fees, some HOAs also levy occasional “assessments” to cover unplanned major expenses such as amenity upgrades or facility repairs. These situational levies can run into thousands of dollars.
Before purchasing a fix-and-flip or rental property in an HOA community, be sure to factor in the fees and possible assessments to your project overhead and holding costs.
An HOA’s CC&Rs are not the same as zoning ordinances and building codes imposed and enforced by local government. In fact, because CC&Rs are entered into voluntarily, they can actually be more restricting, and much more specific, than local codes and zoning laws.
Here are some of the many items an investor can waste thousands on if they are not aware of CC&R restrictions:
- Exterior siding materials and color
- Roofing materials and color
- Exterior door materials, color and fixtures
- Exterior lighting
- Landscaping restrictions
- Outdoor kitchen/barbecue restrictions
- Pool size, materials, color and placement
- Paving materials and color
A real estate investor who is accustomed to completing property renovations with only building codes and zoning requirements in mind can find themselves breaking multiple CC&R rules. This can add up to tens of thousands of dollars in materials and labor.
It's also important to know if there are any restrictions on the hours your crew can work. Investors who are accustomed to working on their projects around the clock may find there are strict rules about when the work day must start and end.
Find Houses to Flip in HOA Communities | THE BIGGEST UH-OH
If you are purchasing an investment property in an HOA community with the intention of holding it as a rental property, whatever you do, make sure there is no restriction in the CC&Rs against offering the property for rent or lease. Also, if you are a fix-and-flip investor and your property does not sell right away, if your HOA prohibits renting, you will not have rental income as a plan B to fall back on. Be prepared to continue paying all of the holding costs for as long as it takes to get your flip sold.